'A bubble will pop!' Bank of England warned over house prices boost

House prices have already surged this year through a combination of factors such as rock bottom interest rates and the stamp duty holiday. While there has been suggestion growth may slow next year a relaxation of lending rules could work to send house prices higher still. The checks on mortgage applicants were tightened in 2014 to try to regulate borrowing and prevent a future financial crisis like in 2007. The idea of relaxing these rules has prompted concerns the resulting price rises would be unsustainable and could pose similar risks.

Gemma Harle, managing director at Quilter Financial Planning explained: “Now the stamp duty holiday has been rescinded we are starting to see the volume of transactions reduce and are likely to also see house prices deflate slowly as a result.

“However, changing the affordability rules could be at the cost of perpetuating unsustainable house price growth leading to a housing bubble which eventually pops like we saw in the previous financial crash.

“Ultimately, this could lead to many people being left with negative equity, which can be a disastrous position to be in particularly early on in life.”

Personal Finance Analyst at Hargeaves Lansdown Sarah Coles also warned creating a “boom on top of a boom” could risk creating a bubble in the housing market.

A decision on any changes is expected at the end of the year but there have been reports one particular area being considered is changing the additional interest rate charge which is used to test a borrower’s ability to pay when their initial fixed deal comes to an end.

This is typically based on the lender’s standard variable rate plus three percent however it has been suggested that given the current era of low interest rates such a rate rise would be unlikely to happen.

A change in the criteria could be seen as a major boost to first-time buyers but it may also have wider consequences for the housing market.

Laura Suter, head of personal finance at AJ Bell predicted any relaxation of the rules would: “Likely spur an increased rise in house prices.”

She added: “House prices rose by 9 percent in the first nine months of the year, and 16 percent since the start of 2020, as all manner of factors drove people to move house and pushed prices up.

“Record low mortgage rates have been one factor in fuelling this growth and if we coupled that with more relaxed lending rules, it’s likely to keep driving prices higher.”

Another factor has been the stamp duty holiday which saw buyers rushing to take advantage of the tax discount before it ended in September.

Sales have still remained highly buoyant since then though with latest figures from Nationwide last week finding house prices grew 0.9 percent month on month in November.

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Ms Coles suggested the impact of changing lending rules could vary a lot though depending on how much the rules were tweaked and how much that ended up filtering through to more buyers emerging.

If changes to the rules do push prices up higher they would, in the long run, cause more problems for first-time buyers though with the need to borrow more and find a bigger deposit wiping out any gains from easier lending requirements.

Ms Suter also suggested there were risks with future rate rises on the horizon.

She warned: “The Bank of England has a balance to strike, as borrowers with only a 5 percent deposit, who are able to borrow more under looser affordability rules, just as we head towards higher interest rates could create a recipe for some to end up with very squeezed finances.”

The Bank of England declined to comment further on the review.


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